INVESTMENT SCORECARD
The Fund was up 8.3% in the quarter, roughly in line with the return for the S&P 500 of 8.9%.
The largest contributor to performance was Deere (2.3% of net assets as of September 30, 2020) (+42%), which rose as the market anticipated a long awaited cyclical recovery for agricultural equipment. Additionally, Deere's upcoming advances in next generation agricultural equipment and precision farming should help the company expand margins and increase cash flows. Another top contributor was Brown-Forman (3.2%) (+20%), which reported strong results as consumers continue to gravitate toward well-known brands such as the company's flagship Jack Daniel's family. Brown-Forman's sales through retail channels remain strong, partially offsetting weakness at bars and restaurants, which should improve post-COVID-19. Stockholm-based smokeless tobacco producer Swedish Match (3.0%) (+16%) was another top contributor, largely due to continued sales growth and expanding distribution for its tobacco-free nicotine pouch ZYN. Shares of AMETEK (3.1%) (+11%) gained, as the company's defense and medical markets have remained strong this year, with industrial markets improving sequentially since March. In addition, AMETEK is also in active discussions with several acquisition prospects and expects to close one or more deals by the end of this year. Finally, Berkshire Hathaway (1.8%)(+20%) generated strong performance in the quarter due to the increase of its public stock investments, led by its $120 billion position in Apple and expected improvement in its transportation (BNSF) business. Investors also welcomed Berkshire's deployment of capital with new investments in Japan and tech firm Snowflake.
Detractors from performance included Energizer Holdings (0.5%) (-17%), as strong battery demand in the U.S. was partially offset by higher air freight costs, which are expected to continue into its fiscal fourth quarter (ending September) and weaker international sales attributable to COVID-19. Going forward, battery demand remains solid in the U.S., the company is gaining share and should gain distribution during the important holiday season, and auto do-it-yourself industry sales are strong, which should benefit its auto business. Another detractor was Crane (0.6%) (-15%), which is experiencing continued weakness in its aerospace business due to continued curtailed travel as well as weakness in its vending business, with vending machine locations such as office buildings, schools, and manufacturing facilities either being closed or having fewer occupants. Bank of New York Mellon (0.8%) (-11%) has been struggling with interest rate compression headwinds due to Federal Reserve policy and impacts on its net interest margin. The company now expects interest income will bottom in early 2021 as the increase in balances mitigates the lower yield, positioning the firm for growth in 2H 2021. Despite better than expected results in its legacy satellite video business, DISH (0.4%) (-16%) declined after management failed to share previously promised financial details on its planned wireless build. DISH also added to its spectrum portfolio (and debt load) in a September FCC auction. Finally, Chevron (0.3%) (-18%) declined amid continued uncertainty about global economic growth and potentially continued depressed demand for oil.
LET'S TALK STOCKS
The following are stock specifics on selected holdings of our Fund. Favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend that we believe will develop over time. Individual securities mentioned are not necessarily representative of the entire portfolio. For the following holdings, the share prices are listed first in United States dollars (USD) and second in the local currency, where applicable, and are presented as of September 30, 2020.
Brown-Forman Corp. (BF.A, Financial)(BF.B, Financial) (3.2% of net assets as of September 30, 2020) (BF/A | BF/B β $68.68/$75.32 β NYSE) is a leading global distilled spirits producer. Spirits is an advantaged category that enjoys high margins, low capital requirements, strong free cash flow generation, and good pricing power. The company's global brands include Jack Daniel's Tennessee whiskey, Woodford Reserve bourbon, and el Jimador and Herradura tequilas, among others. Jack Daniel's is one of the world's most valuable spirits brands, enjoying strong growth both in the U.S. and internationally as consumers increasingly choose to drink American whiskies. While Brown-Forman does face some near term headwinds related to trade disputes and the ongoing coronavirus pandemic, the company is positioned to grow revenues and profits substantially over the next several years. While the company is family controlled, we believe that if it ever became available for sale it would be highly coveted by other large global spirits players.
Comcast Corp. (CMCSA, Financial) (1.1%) (CMCSA β $46.26 β NYSE), is a broadband and television provider in the U.S., U.K., Italy, and Germany. CMCSA is also a leading media company through its ownership of NBCUniversal. Comcast launched Peacock, a new streaming service (with ad-supported tiers), in July. The firm is a strong free cash flow generator and its valuation is attractive at 8x 2021 projected EBITDA.
Johnson & Johnson (JNJ, Financial) (0.3%) (JNJ β $148.88 β NYSE) is the world's largest and one of the most diversified healthcare companies, which is helping it to weather the COVID-19 crisis better than most of its peers. The company's pharmaceutical business is one of the fastest growing in the industry, driven by multiple essential oncology and anti-inflammatory products. Johnson & Johnson's medical device business is recovering quickly from the March halt in non-emergency surgeries, and should post double digit growth next year as they work through the backlog of deferred procedures. Johnson & Johnson has the management and the strong balance sheet to emerge from this crisis stronger than before.
Newmont Corp. (NEM, Financial) (1.7%) (NEM β $63.45 β NYSE) based in Denver, Colorado, is the largest gold mining company in the world. Founded in 1921 and publicly traded since 1925, NEM is the only gold company included in the S&P 500 Index and Fortune 500. Newmont consummated a $10 billion stock merger with Goldcorp in April of 2019 in which it acquired eight high quality gold mines in the Americas. We expect Newmont to produce approximately 6.5 million ounces of gold in 2020 at all-in sustaining costs of $950 per ounce. Post its acquisition of Goldcorp, Newmont is working towards turning around Goldcorp's former underperforming assets and establishing a large, low cost, well capitalized gold mining business which generates free cash flow at almost any gold price and has the capacity to grow production organically. As such, the company is in the process of cementing its position as the premier gold investment vehicle in the world.
Note: The views expressed in this Shareholder Commentary reflect those of the Portfolio Managers only through the end of the period stated in this Shareholder Commentary. The Portfolio Managers' views are subject to change at any time based on market and other conditions. The information in this Portfolio Managers' Shareholder Commentary represents the opinions of the individual Portfolio Managers and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Views expressed are those of the Portfolio Managers and may differ from those of other portfolio managers or of the Firm as a whole. This Shareholder Commentary does not constitute an offer of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this Shareholder Commentary has been obtained from sources we believe to be reliable, but cannot be guaranteed.
